<PAGE>

                  AIRFUND II International Limited Partnership


                Annual Report to the Partners, December 31, 1997


<PAGE>

Dear Investor:

We are pleased to provide the Annual Report for AIRFUND II International Limited
Partnership which contains important information concerning the recent operating
results and current financial position of your investment program. Please refer
to the index on the following page for a listing of information contained in
this report.

If you have any questions about your investment program or, if you would like a
copy of Form 10-K for this program, please contact our Investor Services
Representatives at 1-800-247-3863.

Very truly yours,

/s/ GEOFFREY A. MACDONALD

Geoffrey A. MacDonald
Chairman and Co-founder


<PAGE>

                  AIRFUND II International Limited Partnership

                     INDEX TO ANNUAL REPORT TO THE PARTNERS

                                                                          Page
                                                                          ----

SELECTED FINANCIAL DATA                                                      2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS                                        3-7


FINANCIAL STATEMENTS:

Report of Independent Auditors                                               8

Statement of Financial Position
at December 31, 1997 and 1996                                                9

Statement of Operations
for the years ended December 31, 1997, 1996 and 1995                        10

Statement of Changes in Partners' Capital
for the years ended December 31, 1997, 1996 and 1995                        11

Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995                        12

Notes to the Financial Statements                                        13-22


ADDITIONAL FINANCIAL INFORMATION:

Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed                                     23

Statement of Cash and Distributable
Cash From Operations, Sales and Refinancings                                24

Schedule of Costs Reimbursed to the General Partner
and its Affiliates as Required Section 10.4 of the Amended
and Restated Agreement and Certificate of Limited Partnership               25


                                      -1-
<PAGE>

                             SELECTED FINANCIAL DATA

     The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.

     For each of the years in the five year period ended December 31, 1997:

<TABLE>
<CAPTION>
    Summary of
    Operations             1997         1996         1995          1994         1993
--------------------    ---------    ---------    ----------    ----------   -------
<S>                     <C>           <C>           <C>           <C>           <C>
Lease revenue           $ 3,224,618   $ 4,706,774   $ 6,585,836   $ 9,001,993   $ 7,976,109

Net loss                $(1,762,752)  $(3,649,940)  $(5,286,053)  $(1,474,819)  $(4,686,207)

Per Unit:
   Net loss             $     (0.62)  $     (1.28)  $     (1.85)   $    (0.52)  $     (1.64)

   Cash distributions
     declared           $        --   $      2.25   $      1.75    $     2.50   $      2.50


Financial Position
--------------------

Total assets            $ 9,765,106   $13,163,812   $21,432,133   $31,553,833   $40,195,205

Total long-term
obligations             $ 2,677,520   $ 3,419,785   $ 1,432,396   $        --   $        --

Partners' capital       $ 6,840,127   $ 8,602,879   $18,637,361   $28,924,079   $37,542,705
</TABLE>


                                      -2-
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

             Year ended December 31, 1997 compared to the year ended
             December 31, 1996 and the year ended December 31, 1996
                  compared to the year ended December 31, 1995

      Certain statements in this annual report of AIRFUND II International
Limited Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, and the ability of Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("EFG"), to collect all rents due under the attendant lease
agreements and successfully remarket the Partnership's equipment upon the
expiration of such leases.

      The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. The computer
programs of EFG were designed and written using four digits to define the
applicable year. As a result, EFG does not anticipate system failure or
miscalculations causing disruptions of operations. Based on recent assessments,
EFG determined that minimal modification of software is required so that its
network operating system will function properly with respect to dates in the
year 2000 and thereafter. EFG believes that with these modifications to the
existing operating system, the Year 2000 Issue will not pose significant
operational problems for its computer systems. EFG will utilize internal
resources to upgrade software for Year 2000 modifications and anticipates
completing the Year 2000 project by December 31, 1998, which is prior to any
anticipated impact on its operating system. The total cost of the Year 2000
project is expected to be insignificant and have no effect on the results of
operations of the Partnership.

Overview

      As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. During 1990 and 1991, the Partnership purchased
four commercial jet aircraft and a proportionate interest in two additional
aircraft which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. Subsequently, all of the aircraft in the
Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft or sold (see below). At December 31, 1997 the Partnership owned
three aircraft and proportionate interests in six additional aircraft. All of
the Partnership's aircraft are currently on lease. Upon expiration of the
current lease agreements, each aircraft will be re-leased or sold depending on
prevailing market conditions and the assessment of such conditions by EFG to
obtain the most advantageous economic benefit. Presently, the Partnership is a
Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action
Lawsuit could alter the nature of the Partnership's organization and its future
business operations. See Note 7 to the accompanying financial statements.

Results of Operations

      For the year ended December 31, 1997, the Partnership recognized lease
revenue of $3,224,618 compared to $4,706,774 and $6,585,836 for the years ended
December 31, 1996 and 1995, respectively. The decrease in lease revenue from
1996 to 1997 was due primarily to the lease term expiration related to the
Partnership's Lockheed L-1011-100 aircraft which expired in September 1996 and
was subsequently re-leased in November 1997 and the sale of a 727-200 Advanced
aircraft in July 1996 (see discussions below). This decrease was partially
offset by the recognition of a full year's lease revenue related to both the
Partnership's Boeing 727-251 Advanced aircraft which was re-leased to
Transmeridian Airlines, Inc. ("Transmeridian") in September 1996 and its
interest in two McDonnell Douglas MD-82 aircraft which were acquired in March
1996 in connection with the like-kind exchange transaction. The Partnership
recognized lease revenue of approximately $640,000 and $433,000 related to the
two MD-82 aircraft during the years ended December 31, 1997 and 1996,
respectively. In


                                      -3-
<PAGE>

aggregate, the five replacement aircraft generated approximately $1,017,000 of
lease revenue during the year ended December 31, 1997, compared to approximately
$811,000 in 1996 (see discussions below). The decrease in lease revenue from
1995 to 1996 was due primarily to lease term expirations related to both the
Partnership's Lockheed L-1011-100 aircraft and its proportionate interest in a
Lockheed L-1011-50 aircraft which expired in June 1996, and the sale of a Boeing
727-200 Advanced aircraft in July 1996 (see discussions below). This decrease
was partially offset by the effects of the Partnership's aircraft exchange which
was concluded late in the first quarter of 1996. As a result of the exchange,
the Partnership replaced its ownership interest in a Boeing 747-SP aircraft,
having aggregate quarterly lease revenues of $149,640, with interests in five
other aircraft (three Boeing 737 aircraft leased by Southwest Airlines, Inc. and
two McDonnell Douglas MD-82 aircraft leased by Finnair OY) having aggregate
quarterly lease revenues of $254,373. The Finnair Aircraft were exchanged into
the Partnership on March 25, 1996. Accordingly, revenue for year ended December
31, 1996 did not fully reflect the annual rents ultimately recognized from the
like-kind exchange.

      The Partnership's Boeing 727-251 Advanced aircraft, formerly on a renewal
rental agreement with Northwest Airlines, Inc. ("Northwest") was returned upon
expiration of its lease term on November 30, 1995. This aircraft underwent heavy
maintenance at a cost of $984,000, all of which was expensed during the year
ended December 31, 1996. During 1996, the Partnership received $468,133 from the
former lessee of this aircraft, representing a reimbursement of additional heavy
maintenance costs. In September 1996, the Partnership entered into a new
28-month lease agreement with Transmeridian, to re-lease this aircraft for
aggregate rents over the lease term of approximately $1,941,000. This aircraft
generated approximately $972,000 of lease revenue during the year ended December
31, 1997, compared to approximately $293,000 and $716,000 during the years ended
December 31, 1996 and 1995, respectively.

      The Partnership sold a Boeing 727-200 Advanced aircraft to Northwest
during the second half of 1996. In addition to sales proceeds, the Partnership
received lease termination rents of $429,351 in connection with this sale as the
aircraft was sold prior to the expiration of the related lease term. In
aggregate, this aircraft generated lease revenue of approximately $1,422,000 and
$1,717,000 for the years ended December 31, 1996 and 1995, respectively.

      The Partnership owns a whole and a partial interest in two Lockheed L-1011
aircraft formerly leased to Cathay Pacific Airways Limited ("Cathay"). The
Partnership's original lease agreements with Cathay provided for semi-annual
rent adjustments based on the six month London Inter-Bank Offered Rate
("LIBOR"). Accordingly, rents generated from these leases fluctuated in relation
to the prevailing LIBOR rate on a semi-annual basis. The Partnership's renewal
lease agreements with Cathay (having adjusted semi-annual rents aggregating
$1,353,599) expired on February 14, 1996 and were extended until April 11, 1996.
Subsequent to this extension, Cathay again extended the lease on one of the
aircraft until June 30, 1996 and on the other until September 30, 1996, both at
fixed rates. The Partnership recognized aggregate revenue from the extensions of
both of these aircraft of $576,814 in 1996. Cathay subsequently returned both
aircraft to the Partnership upon the expiration of the extensions and both
aircraft underwent heavy maintenance. The heavy maintenance on the Lockheed
L-1011-50 cost the Partnership approximately $400,000, the majority of which was
expensed during the year ended December 31, 1996. The Partnership entered into a
new 1-year lease agreement with Aer Lease Limited ("Aer Lease"), with respect to
its interest in the L-1011-50 aircraft, at a base rent to the Partnership of
$39,550 per month, beginning April 27, 1997. The Partnership recognized lease
revenue of approximately $320,000 related to this aircraft during the year ended
December 31, 1997 compared to $302,000 and $719,000 during the years ended
December 31, 1996 and 1995, respectively. Aer Lease has entered into an
agreement with the Partnership to purchase the L-1011-50 aircraft at the
expiration of the lease term. The Partnership is expected to receive proceeds of
approximately $554,000 related to the sale of its interest in this aircraft. The
heavy maintenance on the Lockheed L-1011-100 cost the Partnership approximately
$947,000, approximately $400,000 of which was previously expensed during the
year ended December 31, 1996. The Partnership entered into a new 3-year lease
agreement with Classic Airways Limited ("Classic") related to this aircraft with
a base rent to the Partnership of $80,000 per month, effective November 1, 1997.
In addition, Classic has been granted an option to purchase the aircraft for
$2,500,000 and $2,000,000 after two years and the entire term of the lease have
elapsed, respectively. The demand for L-1011 aircraft is weak, limited
principally to air cargo carriers and operators of passenger charters. Several
major airlines have reduced their commitment to the Lockheed L-1011 aircraft.
Such


                                      -4-
<PAGE>

circumstances have inhibited the remarketing of the Partnership's L-1011
aircraft and have required the Partnership to incur costs to meet the needs of
Aer Lease and Classic.

      The Partnership's Boeing 727-208 Advanced aircraft is under a two year
renewal agreement with American Trans Air, Inc. ("ATA"). The renewal agreement,
scheduled to expire in January 1999, provides revenue of $63,500 per month to
the Partnership. The Partnership recognized lease revenue of approximately
$770,000 from this aircraft during the year ended December 31, 1997 compared to
$762,000 during each of the years ended December 31, 1996 and 1995.

      The Partnership holds a proportionate ownership interest in the L-1011-50
aircraft, the Southwest aircraft and the Finnair Aircraft discussed above. The
remaining interests are owned by other affiliated partnerships sponsored by EFG.
All partnerships individually report, in proportion to their respective
ownership interests, their respective shares of assets, liabilities, revenues
and expenses associated with the aircraft (see Notes 2 and 3 to the financial
statements).

      Interest income for the year ended December 31, 1997 was $110,035 compared
to $265,820 and $172,530 for the years ended December 31, 1996 and 1995,
respectively. Generally, interest income is generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments.
Interest income in 1996 included $39,346 earned on cash held in a
special-purpose escrow account in connection with the like-kind exchange
transactions and also reflected a temporary increase in the Partnership's cash
available for investment resulting from the receipt of sale proceeds associated
with the Boeing 727-200 Advanced aircraft.

      During July 1996, the Partnership sold a Boeing 727-200 Advanced jet
aircraft with an original cost and net book value of $11,164,679 and $3,074,680,
respectively, to the existing lessee. In connection with this sale, the
Partnership realized sale proceeds of $3,535,649, which resulted in a net gain,
for financial statement purposes, of $460,969.

      In September 1995, the Partnership transferred its entire ownership
interest (23.19%) in a Boeing 747-SP aircraft (the "United Aircraft") to its
lessee, United. The transaction was structured as a like-kind exchange for
income tax reporting purposes. The Partnership received aggregate cash
consideration of $1,910,907, including $106,411 for rent accrued through the
transfer date. The net cash consideration of $1,804,496 was deposited into a
special-purpose escrow account through a third-party exchange agent pending the
completion of the aircraft exchange. The Partnership's interest in the United
Aircraft had a net book value of $2,301,510 at the date of transfer and resulted
in a net loss for financial reporting purposes of $497,014.

      In November 1995, the Partnership partially replaced the United Aircraft
with a 13.11% ownership interest in the Southwest Aircraft, at an aggregate cost
of $1,919,500. To acquire the interest in the Southwest Aircraft, the
Partnership obtained financing of $1,432,396 from a third-party lender and
utilized $487,104 of the cash consideration received from the transfer of the
United Aircraft. The remaining ownership interest of 86.89% in the Southwest
Aircraft is held by affiliated equipment leasing programs sponsored by EFG.

      Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% ownership interest in two Finnair Aircraft at
a total cost to the Partnership of $4,157,280. To acquire the ownership interest
in the Finnair Aircraft, the Partnership paid $1,389,942, including the
remaining balance of the United cash consideration, and obtained financing of
$2,767,338 from a third-party lender. The remaining ownership interest of 85.15%
of the Finnair Aircraft is held by affiliated equipment leasing programs
sponsored by EFG. The like-kind exchange, involving the United, Southwest and
Finnair Aircraft, was undertaken, in part, to mitigate the Partnership's
economic risk resulting from the United Aircraft being returned to the
Partnership upon its lease expiration in April 1996 and remaining off-lease for
an extended period. The exchange enabled the Partnership to replace a
specialized aircraft with other aircraft which are used more widely in the
industry and also to significantly extend its rental stream with two
creditworthy lessees.

      The Partnership recorded a write-down of aircraft carrying values,
representing impairments related to the Partnership's L-1011 aircraft, during
each of the years ended December 31, 1996 and 1995. The resulting charges,
$2,832,800 ($0.99 per limited partnership unit) in 1996 and $6,139,040 ($2.15
per limited partnership) in


                                      -5-
<PAGE>

1995 were based on a comparison of estimated net realizable values and
corresponding carrying values for each of the Partnership's aircraft.

      Net realizable values were estimated based on (i) third-party appraisals
of the Partnership's aircraft and (ii) EFG's assessment of prevailing market
conditions for similar aircraft. Market values for certain of the Partnership's
commercial jet aircraft have continued to deteriorate. Consistent price
competition and other pressures within the airline industry have inhibited
sustained profitability for many carriers. Most major airlines have had to
re-evaluate their aircraft fleets and operating strategies. Aircraft condition,
age, passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.

      Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft will be dependent upon many factors, including EFG's ability to
sell and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.

      The total economic value realized upon final disposition of each aircraft
is comprised of all primary lease term revenue generated from that aircraft,
together with its residual value. The latter consists of cash proceeds realized
upon the aircraft's sale in addition to all other cash receipts obtained from
renting the aircraft on a re-lease, renewal or month-to-month basis.
Consequently, the amount of gain or loss reported in the financial statements is
not necessarily indicative of the total residual value the Partnership achieved
from leasing the aircraft

      Interest expense was $268,916 or 8.3% in 1997, $264,200 or 5.6% of lease
revenue in 1996 and $19,198 or less than 1% of lease revenue in 1995. Interest
expense resulted from financing obtained from third-party lenders in connection
with the Southwest Aircraft and the Finnair Aircraft, described above, which
were financed in December 1995 and March 1996, respectively. Interest expense in
future years will decline as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding debt.

      Management fees were 5% of lease revenue during 1997, 1996 and 1995 and
will not change as a percentage of lease revenue in future periods.

      Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as insurance,
printing, distribution and remarketing expenses. The overall increase in
operating expenses from 1995 to 1997 was due primarily to increases in
administrative charges, professional service costs and remarketing expenses.
Operating costs in 1996 and 1997 included significant heavy maintenance expenses
to facilitate the remarketing of certain of the Partnership's aircraft,
discussed above. In addition, in 1996 and 1997 the Partnership incurred legal
costs associated with Transmeridian Airlines legal proceedings (see Note 7 to
the financial statements, herein). The amount of future operating expenses
cannot be predicted with certainty; however, such expenses are usually higher
during the acquisition and liquidation phases of a partnership. Other
fluctuations will occur in relation to the volume and timing of aircraft
remarketing activities. Depreciation and amortization expense was $3,377,350,
$3,650,745 and $4,902,840 for the years ended December 31, 1997, 1996 and 1995,
respectively.

Liquidity and Capital Resources and Discussion of Cash Flows

      The Partnership by its nature is a limited life entity which was
established for specific purposes described in the preceding "Overview". As an
equipment leasing program, the Partnership's principal operating activities
derive from aircraft rental transactions. Accordingly, the Partnership's
principal source of cash from operations is generally provided by the collection
of periodic rents. These cash inflows are used to satisfy debt service
obligations associated with leveraged leases, and to pay management fees and
operating costs. Operating activities generated net cash inflows of $496,997,
$3,205,567 and $6,010,056 in 1997, 1996 and 1995, respectively. The expiration
of the Partnership's lease agreements, described above, have caused an overall


                                      -6-
<PAGE>

decline in the Partnership's lease revenue and corresponding sources of
operating cash. This overall decline has been partially offset by rents
generated in connection with the Southwest and Finnair Aircraft and re-lease of
the aircraft to Transmeridian and Aer Lease (see Results of Operations). In
addition, the Partnership has expended substantial funds in connection with its
remarketing efforts related to its L-1011 and Boeing 727-251 Advanced aircraft
during 1997 and 1996. Overall, expenses associated with rental activities, such
as management fees, and net cash flow from operating activities will decline as
the Partnership remarkets its aircraft. Ultimately, the Partnership will dispose
of all aircraft under lease. This will occur principally through sale
transactions whereby each aircraft will be sold to the existing lessee or to a
third party. Generally, this will occur upon expiration of each aircraft's
primary or renewal/re-lease term.

      Cash expended for equipment acquisitions and cash realized form asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. For the year ended December 31, 1996, the
Partnership expended $72,550 in cash in connection with the like-kind exchange
transactions referred to above. During year ended December 31, 1996, the
Partnership realized $3,535,649 in proceeds from the sale of the Boeing 727-200
Advanced aircraft. There were no equipment acquisitions or sales during 1997 or
1995. Future inflows of cash from asset disposals will vary in timing and amount
and will be influenced by many factors including, but not limited to, the
frequency and timing of lease expirations, the equipment's condition and age,
and future market conditions.

      As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, a portion or all of the rental payment will be
used to repay principal and interest. The Partnership also has a balloon payment
obligation at the expiration of the primary lease term related to the Finnair
Aircraft of $1,411,035 (see Note 5 to the financial statements, included
herein).

      Cash distributions paid to the Recognized Owners consist of both a return
of and a return on capital. To the extent that cash distributions consist of
Cash From Sales or Refinancings, substantially all of such cash distributions
should be viewed as a return of capital. Cash distributions do not represent and
are not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each aircraft
at its disposal date. Future market conditions, technological changes, the
ability of EFG to manage and remarket the aircraft, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's aircraft portfolio.

      Overall, the future liquidity of the Partnership will be influenced by the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements. The General Partner anticipates that cash proceeds
resulting from upon the collection of contractual rents and the outcome of
residual activities will satisfy the Partnership's future expense obligations.
However, the amount of cash available for distribution in future periods is
expected to fluctuate widely as the General Partner attempts to remarket the
Partnership's aircraft and possibly upgrade certain aircraft to meet the
standards of potential successor lessees.

      The Partnership has incurred significant heavy maintenance costs in
connection with its remarketing efforts related to the two L-1011 aircraft and
the Boeing 727-251 aircraft. The Partnership also expects to incur additional
costs in future years as the Partnership's remaining aircraft are remarketed.
The amount of such costs will depend upon the extent of upgrades or
refurbishments necessary to prepare these aircraft for sale or re-lease. These
costs have presented, and will continue to present, demands on the Partnership's
cash position. Accordingly, the General Partner will continue to reserve a
significant portion of the Partnership's cash for such purposes. The General
Partner anticipates that future cash distributions will be contingent primarily
upon the realization of sale proceeds generated from remarketing the
Partnership's remaining aircraft and the extent of the Partnership's cash
reserve requirements. Accordingly, the General Partner expects to continue to
suspend the declaration of quarterly cash distributions between the periods
corresponding to major remarketing events.


                                      -7-
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS



To the Partners of AIRFUND II International Limited Partnership:

      We have audited the accompanying statements of financial position of
AIRFUND II International Limited Partnership as of December 31, 1997 and 1996,
and the related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIRFUND II International
Limited Partnership at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

      Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.

                                                               ERNST & YOUNG LLP

Boston, Massachusetts
March 10, 1998


                                      -8-
<PAGE>

                  AIRFUND II International Limited Partnership

                         STATEMENT OF FINANCIAL POSITION
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>
                                                 1997                  1996
                                            -------------         -------------
<S>                                         <C>                   <C>
ASSETS

Cash and cash equivalents                   $   2,102,494         $   2,347,762

Rents receivable                                   65,120                    --

Accounts receivable - affiliate                   305,359               146,567

Equipment at cost, net of accumulated
   depreciation of $43,339,081 and
   $39,961,731 at December 31, 1997
   and 1996, respectively                       7,292,133            10,669,483
                                            -------------         -------------
     Total assets                           $   9,765,106         $  13,163,812
                                            =============         =============


LIABILITIES AND PARTNERS' CAPITAL

Notes payable                               $   2,677,520         $   3,419,785
Accrued interest                                   29,618                35,929
Accrued liabilities                                 8,250               541,534
Accrued liabilities - affiliate                    42,524               489,018
Deferred rental income                            167,067                74,667
                                            -------------         -------------
     Total liabilities                          2,924,979             4,560,933
                                            -------------         -------------
Partners' capital (deficit):
   General Partner                             (2,653,450)           (2,565,312)
   Limited Partnership Interests
   (2,714,647 Units;
   initial purchase price of $25 each)          9,493,577            11,168,191
                                            -------------         -------------

     Total partners' capital                    6,840,127             8,602,879
                                            -------------         -------------

     Total liabilities and partners'
     capital                                $   9,765,106         $  13,163,812
                                            =============         =============
</TABLE>


                 The accompanying notes are an integral part of
                           these financial statements.

                                      - 9 -
<PAGE>

                  AIRFUND II International Limited Partnership

                             STATEMENT OF OPERATIONS
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                      1997              1996              1995
                                  ------------      ------------      ------------
<S>                               <C>               <C>               <C>
Income:
   Lease revenue                  $  3,224,618      $  4,706,774      $  6,585,836

   Interest income                     110,635           265,820           172,530

   Gain on sale of equipment                --           460,969                --

   Loss on exchange of equipment            --                --          (497,014)
                                  ------------      ------------      ------------
      Total income                   3,335,253         5,433,563         6,261,352
                                  ------------      ------------      ------------


Expenses:

   Depreciation                      3,377,350         3,650,745         4,902,840

   Write-down of equipment                  --         2,832,800         6,139,040

   Interest expense                    268,916           264,200            19,198

   Equipment management fees
      - affiliate                      161,231           235,339           329,292

   Operating expenses - affiliate    1,290,508         2,100,419           157,035
                                  ------------      ------------      ------------

      Total expenses                 5,098,005         9,083,503        11,547,405
                                  ------------      ------------      ------------

Net loss                          $ (1,762,752)     $ (3,649,940)     $ (5,286,053)
                                  ============      ============      ============

Net loss
   per limited partnership unit   $      (0.62)     $     (1.28)      $      (1.85)
                                  ============      ===========       ============

Cash distributions declared
   per limited partnership unit   $         --      $       2.25      $       1.75
                                  ============      ============      ============
</TABLE>


                 The accompanying notes are an integral part of
                           these financial statements.

                                      - 10 -
<PAGE>

                  AIRFUND II International Limited Partnership

                    STATEMENT OF CHANGES IN PARTNERS' CAPITAL
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                 General
                                 Partner        Recognized Owners
                                             ------------------------
                                 Amount        Units        Amount        Total
                                ---------    ---------     ----------   ----------
<S>                           <C>            <C>          <C>          <C>
Balance at December 31, 1994  $(1,591,892)   2,714,647    $30,515,971  $28,924,079

Net loss - 1995                  (264,303)          --     (5,021,750)  (5,286,053)

Cash distributions declared      (250,033)          --     (4,750,632)  (5,000,665)
                                ---------    ---------     ----------   ----------

Balance at December 31, 1995   (2,106,228)   2,714,647     20,743,589   18,637,361

Net loss - 1996                  (182,497)          --     (3,467,443)  (3,649,940)

Cash distributions declared      (276,587)          --     (6,107,955)  (6,384,542)
                                ---------    ---------     ----------   ----------

Balance at December 31, 1996   (2,565,312)   2,714,647     11,168,191    8,602,879

Net loss - 1997                   (88,138)          --     (1,674,614)  (1,762,752)
                                ---------    ---------     ----------   ----------

Balance at December 31, 1997  $(2,653,450)   2,714,647     $9,493,577   $6,840,127
                               ===========   =========     ==========   ==========
</TABLE>


                 The accompanying notes are an integral part of
                           these financial statements.

                                      - 11 -
<PAGE>

                  AIRFUND II International Limited Partnership

                             STATEMENT OF CASH FLOWS
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                        1997            1996             1995
                                                     -----------     -----------      -----------
<S>                                                  <C>             <C>              <C>
Cash flows from (used in) operating activities:
Net loss                                             $(1,762,752)    $(3,649,940)     $(5,286,053)

Adjustments to reconcile net loss
 to net cash from operating activities:
   Depreciation                                        3,377,350       3,650,745        4,902,840
   Write-down of equipment                                    --       2,832,800        6,139,040
   Gain on sale of equipment                                  --        (460,969)              --
   Loss on exchange of equipment                              --              --          497,014

Changes in assets and liabilities:
   Decrease (increase) in:
      Rents receivable                                   (65,120)        169,906          (65,982)
      Accounts receivable - affiliate                   (158,792)        169,872           19,004
   Increase (decrease) in:
      Accrued interest                                    (6,311)         16,732           19,197
      Accrued liabilities                               (533,284)        448,394         (178,101)
      Accrued liabilities - affiliate                   (446,494)        430,866           33,241
      Deferred rental income                              92,400        (402,839)         (70,144)
                                                     -----------     -----------      -----------
       Net cash from operating activities                496,997       3,205,567        6,010,056
                                                     -----------     -----------      -----------

Cash flow from (used in) investing activities:
   Purchase of equipment                                      --         (72,550)              --
   Proceeds from equipment sales                              --       3,535,649               --
                                                     -----------     -----------      -----------
      Net cash from investing activities                      --       3,463,099               --
                                                     -----------     -----------      -----------
Cash flow used in financing activities:
   Principal payments - notes payable                   (742,265)       (779,949)              --
   Distributions paid                                         --      (7,098,923)      (6,072,236)
                                                     -----------     -----------      -----------
       Net cash used in financing activities            (742,265)     (7,878,872)      (6,072,236)
                                                     -----------     -----------      -----------

Net decrease in cash and cash equivalents               (245,268)     (1,210,206)         (62,180)

Cash and cash equivalents at beginning of year         2,347,762       3,557,968        3,620,148
                                                     -----------     -----------      -----------

Cash and cash equivalents at end of year             $ 2,102,494     $ 2,347,762      $ 3,557,968
                                                     ===========     ===========      ===========


Supplemental disclosure of cash flow information:
   Cash  paid  during  the  year for interest       $   275,227     $   247,468      $        --
                                                     ===========     ===========      ===========
</TABLE>

Supplemental disclosure of non-cash investing and financing activities:
   See Note 3 to the Financial Statements.


                 The accompanying notes are an integral part of
                           these financial statements.

                                      - 12 -
<PAGE>

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                December 31, 1997

NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS

      AIRFUND II International Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 20, 1989 for the purpose of
acquiring and leasing to third parties a specified portfolio of used commercial
aircraft. Partners' capital initially consisted of contributions of $1,000 from
the General Partner (AFG Aircraft Management Corporation, a Massachusetts
corporation) and $100 from the Initial Limited Partner (AFG Assignor
Corporation, a Massachusetts corporation). The Partnership issued 2,714,647
units, representing assignments of limited partnership interests (the "Units"),
to 4,192 investors. Unitholders and Limited Partners (other than the Initial
Limited Partner) are collectively referred to as Recognized Owners. The General
Partner is an affiliate of Equis Financial Group Limited Partnership (formerly
American Finance Group), a Massachusetts limited partnership ("EFG"). The common
stock of the General Partner is owned by AF/AIP Programs Limited Partnership.
EFG and a wholly-owned affiliate are the 99% limited partners and AFG Programs,
Inc., a Massachusetts corporation which is wholly-owned by Geoffrey A.
MacDonald, is the 1% general partner. The General Partner is not required to
make any other capital contributions to the Partnership except as may be
required under the Uniform Act and Section 6.1(b) of the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended").

      EFG is a Massachusetts partnership formerly known as American Finance
Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Partnership and
several other Direct-Participation equipment leasing programs sponsored or
co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.

      The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.

      In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.

     In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG.


                                      -13-
<PAGE>

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

      On June 28, 1991, the Offering of Units of the Partnership was concluded.
The Partnership issued an aggregate of 2,714,647 Units in six Interim Closings
during the period May 17, 1990 through June 28, 1991. The initial purchase of
the aircraft and the associated lease commitments occurred on May 18, 1990.
Additional purchases of aircraft (or proportionate interests in aircraft)
occurred subsequent to each Closing. The six Interim Closings which occurred in
1990 and 1991 and the associated Units issued, purchase price and number of
investors who became Recognized Owners of the Partnership are summarized below.

<TABLE>
<CAPTION>
                                                                         Recognized
  Closing Date                Units Issued        Purchase Price           Owners
-----------------             ------------        --------------        ------------
<S>                           <C>                 <C>                   <C>
May 17, 1990                     1,725,100           $43,127,500               2,600
August 2, 1990                     317,986             7,949,650                 494
October 1, 1990                    159,510             3,987,750                 251
December 27, 1990                  246,845             6,171,125                 398
February 15, 1991                  112,796             2,819,900                 173
June 28, 1991                      152,410             3,810,250                 276
                              ------------        --------------        ------------

          Totals                 2,714,647           $67,866,175               4,192
                              ============        ==============        ============
</TABLE>

      Pursuant to the Restated Agreement, as amended, distributions of
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Partnership shall be made as follows: Prior to Payout, (i)
Distributable Cash From Operations will be distributed 95% to the Recognized
Owners and 5% to the General Partner and (ii) Distributable Cash From Sales or
Refinancings shall be distributed 99% to the Recognized Owners and 1% to the
General Partner. After Payout, (i) all Distributions will be distributed 99% to
the General Partner and 1% to the Recognized Owners until the General Partner
has received an amount equal to 5% of all Distributions made by the Partnership
and (ii) thereafter, all Distributions will be made 90% to the Recognized Owners
and 10% to the General Partner.

      Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 4).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Statement of Cash Flows

      The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in federal agency
discount notes and in reverse repurchase agreements with overnight maturities.
Under the terms of the agreements, title to the underlying securities passes to
the Partnership. The securities underlying the agreements are book entry
securities. At December 31, 1997 the Partnership had $1,988,158 invested in
federal agency discount notes and in reverse repurchase agreements secured by
U.S. Treasury Bills or interests in U.S. Government securities.


                                      -14-
<PAGE>

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)
Revenue Recognition

      Rents are payable to the Partnership monthly or quarterly and no
significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents are
$4,914,573 are due as follow:

<TABLE>

      <S>                                         <C>
      For the year ending December 31, 1998       $ 3,545,561
                                       1999         1,369,012
                                                  -----------
                                      Total       $ 4,914,573
                                                  ===========
</TABLE>

      Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is as
follows:

<TABLE>
<CAPTION>

                                          1997            1996            1995
                                      ----------      -----------      -------
<S>                                   <C>             <C>              <C>
Transmeridian Airlines, Inc.
   (One Boeing 727-251ADV)            $  971,500      $        --      $       --
American Trans Air, Inc.
   (One Boeing 727-208 ADV)           $  770,467      $   762,000      $  762,000
Finnair OY
   (Two MD-82)                        $  639,752      $        --      $       --
Southwest Airlines, Inc.
   (Three Boeing 737-2H4)             $  377,568      $        --      $       --
Northwest Airlines, Inc.
   (One Boeing 727-251 ADV and one
   Boeing 727-200 ADV)                $       --      $ 1,421,629      $2,493,823
Cathay Pacific Airways Limited
   (Two Lockheed L-1011)              $       --      $ 1,419,024      $2,775,726
</TABLE>

      The Partnership entered into a new 1-year lease agreement with Aer Lease
Limited ("Aer Lease") for its proportionate interest in a Lockheed L-1011-50
aircraft at a base rent to the Partnership of $39,550 per month, beginning April
27, 1997. In addition, Aer Lease has entered into an agreement with the
Partnership to purchase the aircraft at the expiration of the lease term. The
Partnership is expected to receive proceeds of approximately $554,000 related to
the sale of its interest in this aircraft.

      The Partnership entered into a new 3-year lease agreement with Classic
Airways Limited ("Classic") related to this aircraft with a base rent to the
Partnership of $80,000 per month, effective November 1, 1997. In addition,
Classic has been granted an option to purchase the aircraft for $2,500,000 and
$2,000,000 after two years and the entire term of the lease have elapsed,
respectively

Use of Estimates

      The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.


                                      -15-
<PAGE>

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

Equipment on Lease

      All aircraft were acquired from EFG or one of its Affiliates. Equipment
cost represents asset base price plus acquisition fees and was determined in
accordance with the Restated Agreement, as amended, and certain regulatory
guidelines. Asset base price was the lower of (i) the actual price paid for the
aircraft by EFG or the Affiliate plus all actual costs accrued by EFG or the
Affiliate while carrying the aircraft less, (a) for all aircraft other than the
Alaska Aircraft, the amount of all rents received by EFG or the Affiliate prior
to selling the aircraft or, (b) with respect to the Alaska Aircraft, rents
received from the date of the commencement of the lease of the aircraft until
the date of the sale to the Partnership or ii) fair market value as determined
by the General Partner in its best judgment, including all liens and
encumbrances on the aircraft, carrying costs and acquisition costs.

Depreciation and Amortization

      The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of equipment to determine whether it exceeds estimated
net realizable value. Adjustments to reduce the net carrying value of equipment
are recorded in those instances where estimated net realizable value is
considered to be less than net carrying value. Such adjustments are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.

      The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.

Accrued Liabilities - Affiliate

      Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 4).

Allocation of Profits and Losses

      For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.

Net Loss and Cash Distributions Per Unit

      Net loss and cash distributions per Unit are based on 2,714,647 Units
outstanding during each of the three years in the period ended December 31, 1997
and computed after allocation of the General Partner's 5% share of net loss and
applicable share of cash distributions (see Note 1).


                                      -16-
<PAGE>

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

Provision for Income Taxes

      No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.

NOTE 3 - EQUIPMENT

      The following is a summary of equipment owned by the Partnership at
December 31, 1997. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 1997 under contracted lease terms.
In the opinion of EFG, the acquisition cost of the equipment did not exceed its
fair market value.

<TABLE>
<CAPTION>

                                         Remaining
                                        Lease Term     Equipment
         Equipment Type                  (Months)       at Cost       Location
--------------------------------------  ----------   ------------    -----------
<S>                                     <C>          <C>             <C>
One Lockheed L-1011-100 (Classic)          22        $ 15,879,518    Foreign
One Boeing 727-208 ADV (ATA)               13          12,928,710    IN
One Boeing 727-251 ADV (Transmeridian)     10           9,732,714    MN
One Lockheed L-1011-50 (Aer Lease)          4           6,013,492    Foreign
Two McDonnell-Douglas MD-82 (Finnair)      19           4,157,280    Foreign
Three Boeing 737-2H4 (Southwest)           24           1,919,500    TX
                                                     ------------

                        Total equipment cost           50,631,214

                    Accumulated depreciation          (43,339,081)
                                                     ------------
  Equipment, net of accumulated depreciation         $  7,292,133
                                                     ============
</TABLE>

      The costs of the Lockheed L-1011-50 aircraft, the two McDonnell-Douglas
MD-82 aircraft, and the three Boeing 737-2H4 aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.

      In September 1995, the Partnership transferred its 23.19% ownership
interest in a Boeing 747-SP-21 commercial jet aircraft (the "United Aircraft"),
pursuant to the rules for a like-kind exchange for income tax reporting
purposes. In November 1995, the Partnership partially replaced the United
Aircraft with a 13.11% ownership interest in the Southwest Aircraft, at an
aggregate cost to the Partnership of $1,919,500. To acquire the interest in the
Southwest Aircraft, the Partnership obtained financing of $1,432,396 from a
third-party lender and utilized $487,104 of the cash consideration received from
the transfer of the United Aircraft. The remaining ownership interest of 86.89%
in the Southwest Aircraft is held by affiliated equipment leasing programs
sponsored by EFG.

      In March 1996, the Partnership completed the replacement of the United
Aircraft with a 14.85% ownership interest in two aircraft leased to Finnair OY
(the "Finnair Aircraft") at a total cost to the Partnership of $4,157,280. To
acquire the ownership interest in the two McDonnell-Douglas MD-82 commercial jet
aircraft (the "Finnair Aircraft"), the Partnership paid $1,389,942, including
the balance of the cash consideration, and obtained


                                      -17-
<PAGE>

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

financing of $2,767,338 from a third-party lender. The remaining ownership
interest of 85.15% in the Finnair Aircraft is held by affiliated equipment
leasing programs sponsored by EFG.

      Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $6,077,000
and a net book value of approximately $4,925,000 at December 31, 1997. (See Note
5.)

      Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."

      As aircraft are sold to third parties, or otherwise disposed of, the
Partnership will recognize a gain or loss equal to the difference between the
net book value of the aircraft at the time of sale or disposition and the
proceeds realized upon sale or disposition. The ultimate realization of
estimated residual value in the aircraft is dependent upon, among other things,
EFG's ability to maximize proceeds from selling or re-leasing the aircraft upon
the expiration of the primary lease terms.

      The Partnership recorded a write-down of aircraft carrying values,
representing impairments related to the Partnership's L-1011 aircraft, during
each of the years ended December 31, 1996 and 1995. The resulting charges,
$2,832,800 ($0.99 per limited partnership unit) in 1996 and $6,139,040 ($2.15
per limited partnership unit) in 1995 were based on a comparison of estimated
net realizable values and corresponding carrying values for each of the
Partnership's aircraft.


NOTE 4 - RELATED PARTY TRANSACTIONS

     All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1997, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:

<TABLE>
<CAPTION>
                                       1997              1996              1995
                                   ------------      ------------      ------------
<S>                                <C>               <C>               <C>
Equipment management fees          $    161,231      $    235,339      $    329,292
Administrative charges                   50,304            28,694            21,000
Reimbursable operating
   expenses due to third parties      1,240,204         2,071,725           136,035
                                   ------------      ------------      ------------
                           Total   $  1,451,739      $  2,335,758      $    486,327
                                   ============      ============      ============
</TABLE>

      As provided under the terms of the Management Agreement, EFG is
compensated for its services to the Partnership. Such services include all
aspects of acquisition, management and sale of equipment. For acquisition
services, EFG was compensated by an amount equal to 3.07% of Equipment Base
Price paid by the Partnership. For management services, EFG is compensated by an
amount equal to the lesser of (i) 5% of gross operating lease rental revenue and
2% of gross full payout lease rental revenue received by the Partnership or (ii)
fees which the General Partner reasonably believes to be competitive for similar
services for similar equipment. Both of these fees are subject to certain
limitations defined in the Management Agreement. Compensation to EFG for
services connected to the sale of equipment is calculated as the lesser of (i)
3% of gross sale proceeds


                                      -18-

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

or (ii) one-half of reasonable brokerage fees otherwise payable under arm's
length circumstances. Payment of the remarketing fee is subordinated to Payout
and is subject to certain limitations defined in the Management Agreement.

      Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG.

      All equipment was purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2.

      All rents and proceeds from the sale of equipment are paid directly to
EFG. EFG temporarily deposits collected funds in a separate interest-bearing
escrow account prior to remittance to the Partnership. At December 31, 1997, the
Partnership was owed $305,359 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 1998.

      Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership, formed in 1995 and owned and controlled by certain principals of
EFG, owns 40,000 Units or 1.47% of the total outstanding units of the
Partnership. EFG owns a 49% limited partnership interest in ONC, which it
acquired in December 1996.

NOTE 5 - NOTES PAYABLE

      Notes payable at December 31, 1997 consisted of installment notes payable
to banks of $2,677,520. The installment notes are non-recourse, with interest
rates ranging between 8.65% and 8.89% and are collateralized by the equipment
and assignment of the related lease payments. All of the notes were originated
in connection with the Southwest Aircraft and the Finnair Aircraft. The
installment notes related to the Southwest Aircraft will be fully amortized by
noncancellable rents. The Partnership, has a balloon payment obligation at the
expiration of the primary lease term related to the Finnair Aircraft of
$1,411,035. The carrying amount of notes payable approximates fair value at
December 31, 1997.

      The annual maturities of the installment notes payable are as follows:

<TABLE>

      <S>                                        <C>
      For the year ending December 31, 1998      $    780,853
                                       1999         1,896,667
                                                 ------------

                                      Total      $  2,677,520
                                                 ============
</TABLE>

NOTE 6 - INCOME TAXES

      The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.

      For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as


                                      -19-
<PAGE>

                  AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

amended, requires that upon dissolution of the Partnership, the General Partner
will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 1997, the General Partner had a negative tax capital account
balance of approximately $811,000.

      The following is a reconciliation between net loss reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>

                                      1997              1996              1995
                                  ------------      ------------      ------------
<S>                               <C>               <C>               <C>
Net loss                          $ (1,762,752)     $ (3,649,940)     $ (5,286,053)
   Tax depreciation in excess
     of financial statement
     depreciation                   (2,136,596)       (3,015,164)       (1,959,389)
   Write-down of equipment                  --         2,832,800         6,139,040
   Deferred rental income               92,400          (402,839)          (70,144)
   Other                              (998,111)        1,501,218           521,195
                                  ------------      ------------      ------------

Net loss for federal income tax
   reporting purposes             $ (4,805,059)     $ (2,733,925)     $   (655,351)
                                  ============      ============      ============
</TABLE>

      The principal component of "Other" consists of the difference between the
tax gain on equipment disposals and the financial statement gain on equipment
disposals. It also includes reversal of certain maintenance reserves.

      The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                        1997              1996
                                                    ------------      ------------
<S>                                                 <C>               <C>
Partners' capital                                   $  6,840,127      $  8,602,879

   Add back selling commissions and organization
     and offering costs                                7,085,240         7,085,240

   Cumulative  difference between federal income
     tax and financial statement income (loss)        (1,208,656)        1,833,651
                                                    ------------      ------------

Partners' capital for federal income tax
     reporting purposes                             $ 12,716,711      $ 17,521,770
                                                    ============      ============
</TABLE>

     Cumulative difference between federal income tax and financial statement
income (loss) represents timing differences.

NOTE 7 - LEGAL PROCEEDINGS

        On or about January 15, 1998, certain plaintiffs (the "Plaintiffs")
filed a class and derivative action, captioned Leonard Rosenblum, et al. v.
Equis Financial Group Limited Partnership, et al., in the United States
District Court for the Southern District of Florida (the "Court") on behalf
of a proposed class of investors in 28 equipment leasing programs sponsored
by EFG, including the Partnership (collectively, the "Nominal Defendants"),
against EFG and a number of its affiliates, including the General Partner, as
defendants (collectively, the "Defendants").  Certain of the Plaintiffs, on
or about June 24, 1997, had filed an earlier derivative action, captioned
Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et
al., in the Superior Court of the Commonwealth of Massachusetts on behalf of
the Nominal Defendants against the Defendants.  Both actions are referred to
herein collectively as the "Class Action Lawsuit."

        The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the
Securities Exchange Act of 1934, common law fraud, breach of contract, breach
of fiduciary duty, and violations of the partnership or trust agreements that
govern each of the Nominal Defendants.  The Defendants have denied, and
continue to deny, that any of them have committed or threatened to commit any
violations of law or breached any fiduciary duties to the Plaintiffs or the
Nominal Defendants.

                                      -20-
<PAGE>

                 AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

        On March 9, 1998, counsel for the Defendants and the Plaintiffs
entered into a Memorandum of Understanding setting forth the terms pursuant
to which a settlement of the Class Action Lawsuit is intended to be achieved
and which, among other things, is expected to reduce the burdens and expenses
attendant to continuing litigation.  The Memorandum of Understanding
represents a preliminary step towards a comprehensive Stipulation of
Settlement between the parties that must be presented to and approved by the
Court as a condition precedent to effecting a settlement.  The Memorandum of
Understanding (i) prescribes a number of conditions necessary to achieving a
settlement, including providing the partners (or beneficiaries, as
applicable) of the Nominal Defendants with the opportunity to vote on any
settlement and (ii) contemplates various changes that, if effected, would
alter the future operations of the Nominal Defendants.  With respect to the
Partnership and 10 affiliated partnerships (hereafter referred to as the
"Exchange Partnerships"), the Memorandum of Understanding provides for the
restructuring of their respective business operations into a single successor
company whose securities would be listed and traded on a national stock
exchange.  The partners of the Exchange Partnerships would receive both
common stock in the new company and a cash distribution in exchange for their
existing partnership interests.  Such a transaction would, among other
things, allow for the consolidation of the Partnership's operating expenses
with other similarly-organized equipment leasing programs.  To the extent
that the parties agree upon a Stipulation of Settlement that is approved by
the Court, the complete terms thereof will be communicated to all of the
partners (or beneficiaries) of the Nominal Defendants to enable them to vote
thereon.

        There can be no assurance that the parties will agree upon a
Stipulation of Settlement,  or that it will be approved by the Court, or that
the outcome of the voting by the partners (or beneficiaries) of the Nominal
Defendants, including the Partnership, will result in a settlement finally
being effected or in the Partnership being included in any such settlement.
The General Partner and its affiliates, in consultation with counsel, concur
that there is a reasonable basis to believe that a Stipulation of Settlement
will be agreed upon by the parties and approved by the Court.  In the absence
of a Stipulation of Settlement approved by the Court, the Defendants intend
to defend vigorously against the claims asserted in the Class Action Lawsuit.
The General Partner and its affiliates cannot predict with any degree of
certainty the ultimate outcome of such litigation.

      On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and various other affiliated investment
programs, filed an action in the United States District Court for the District
of Massachusetts against Northwest, a former lessee of the Partnership. The
trustees are seeking damages from Northwest and a declaratory judgment
concerning Northwest's maintenance and return obligations for certain aircraft
owned by the Partnership. In addition to filing its Answer to the Plaintiffs'
Complaint, Northwest also filed a motion to transfer the venue of this
proceeding to Minnesota. The Court denied such motion. The parties have
completed the initial phase of discovery, and motions for partial summary
judgment is pending. At present, it is not possible to determine the ultimate
outcome of this matter.

      On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines
("Transmeridian") filed an action in the 61st Judicial District Court of Harris
County, Texas entitled Prime Air, Inc. d/b/a Transmeridian Airlines v. Investors
Asset Holding Corp., as Trustee for Airfund II International Limited
Partnership, PLM International, and


                                      -21-
<PAGE>

                 AIRFUND II International Limited Partnership
                        Notes to the Financial Statements

                                   (Continued)

NavCom Aviation, Inc. In that action, Transmeridian claims damages of more that
$3,000,000 for alleged breach of contract, fraud, civil conspiracy, tortious
interference of business relations, negligent misrepresentation, negligence and
gross negligence, and punitive damages against Investors Asset Holding Corp., as
Trustee for Airfund II International Limited Partnership ("Investors Asset") and
its co-defendants. On November 7, 1996, PLM removed the action to the United
Sates District Court for the Southern District of Texas; Investors Asset intends
to seek a transfer of venue to United States District Court for the District of
Massachusetts. On February 14, 1997, Investors Asset answered the Complaint
generally denying the allegations made therein and asserting various defenses.
The Court extended the deadline to June 1, 1998 and placed this action on the
trial calendar for November/December 1998. At present, it is not possible to
determine the ultimate outcome of this matter.


                                      -22-

<PAGE>



                          ADDITIONAL FINANCIAL INFORMATION



<PAGE>

                  AIRFUND II International Limited Partnership

         SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
                              OF EQUIPMENT DISPOSED

              for the years ended December 31, 1997, 1996 and 1995


      The Partnership classifies all rents from leasing aircraft as lease
revenue. Upon expiration of the primary lease terms, aircraft may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the aircraft, in addition to any month-to-month revenue, represent the total
residual value realized for each aircraft. Therefore, the financial statement
gain or loss, which reflects the difference between the net book value of the
aircraft at the time of sale or disposition and the proceeds realized upon sale
or disposition may not reflect the aggregate residual proceeds realized by the
Partnership for such aircraft.

      The following is a summary of cash excess associated with the aircraft
disposition which occurred in the year ended December 31, 1996. No aircraft were
disposed of during the years ended December 31, 1997 or 1995.

<TABLE>

<S>                                                        <C>
Rents earned prior to disposal of aircraft                 $ 11,072,532

Sale proceeds realized upon disposition of aircraft           3,535,649

Total cash  generated  from rents and aircraft sale
proceeds                                                     14,608,181

Original acquisition cost of aircraft disposed               11,164,679

Excess of total cash  generated to cost of aircraft
disposed                                                   $  3,443,502
                                                           ============
</TABLE>


                                      -23-


<PAGE>

                  AIRFUND II International Limited Partnership

            STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
                             SALES AND REFINANCINGS

                      for the year ended December 31, 1997

<TABLE>
<CAPTION>
                                                      Sales and
                                   Operations       Refinancings          Total
                                  ------------      ------------      ------------
<S>                               <C>               <C>               <C>
Net loss                          $ (1,762,752)     $         --      $ (1,762,752)

Add:
   Depreciation                      3,377,350                --         3,377,350
   Management fees                     161,231                --           161,231

Less:
   Principal repayment of notes
   payable                            (742,265)               --          (742,265)
                                  ------------      ------------      ------------

   Cash from operations, sales
   and refinancings                  1,033,564                --         1,033,564

Less:
   Management fees                    (161,231)               --          (161,231)
                                  ------------      ------------      ------------

  Distributable cash from
  operations, sales and
  refinancings                         872,333                --           872,333

Other sources and uses of cash:
   Cash at beginning of year                --         2,347,762         2,347,762
   Net change in receivables and
   accruals                           (872,333)         (245,268)       (1,117,601)
                                  ------------      ------------      ------------

Cash at end of year               $         --      $  2,102,494      $  2,102,494
                                  ============      ============      ============
</TABLE>


                                      -25-
<PAGE>

                  AIRFUND II International Limited Partnership

                       SCHEDULE OF COSTS REIMBURSED TO THE
                 GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
                   BY SECTION 10.4 OF THE AMENDED AND RESTATED
                AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP

                                December 31, 1997


      For the year ended December 31, 1997, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:

<TABLE>


      <S>                                    <C>
      Operating expenses                     $1,806,675
</TABLE>

                                      -26-